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Objectives Explain the meaning of price discrimination Identify the conditions for PD to occur Give examples of PD What effects will it have on welfare & efficiency Evaluate who benefits and who loses from PD

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Conditions for Price discrimination 1.The firm must have some price setting power. (So PC is a no-no for this!) 2.Different (& Identifiable) groups of consumers with different PEDs 3.The firm must be able to stop seepage from one market to another.

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Reason number 1: Excess capacity Seller shave spare capacity that they would rather get something for rather than nothing… E.g. Cheaper restaurant meals at lunchtimes Cheaper car rentals at weekends Cheaper hotels off-peak

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How does this work? If we assume that the MC is constant, and There are two demand curves a peak one which is price inelastic and an off-peak one which is more price elastic, and Demand will peak at predictable times, then…

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How? Then by raising prices to the peak demand and taking advantage of their willingness to pay the firm appropriates some of that consumer surplus for itself. The supplier will often cut prices at other times to use up some of that spare capacity and so increase TR Is there a pattern that makes this more likely in some industries than in others?

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There are some advantages to this Some consumers are bought into the market who would otherwise not have afforded it. Higher output than under a single price monopoly Profits may finance further RnD Profits may cross-subsidise other activities BUT THE MAIN AIM IS RAISE REVENUES AND PROFITS!

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In Practice Do firms really know the shape and location of their cost curves? What will other suppliers in the market do? (Oligopoly) Not all differences in price are to do with different groups having different P.E.D.s!

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Product differentiation Price differences often reflect product differences They may reflect the cost of supplying different groups E.g. difference between business and cattle class on a plane. There is some PD, but the products are different.